The Overnight Reverse Repo Facility
The Fed's overnight reverse repo facility lets money-market funds and other cash-rich institutions park cash directly with the Fed at a guaranteed rate, setting a floor beneath which market repo rates rarely fall.
Prerequisites: Interest on Reserve Balances and Rate Control, Repo and Reverse Repo
Money-market funds hold hundreds of billions of dollars that need to go somewhere every single night. Banks aren't the only eligible counterparty, and Treasury bills aren't always available in the size funds need. The Fed built a direct outlet for this cash: the overnight reverse repo facility (ON RRP), where the Fed itself borrows cash overnight from a wide list of eligible counterparties against Treasury collateral, at a fixed rate it sets.
In an ON RRP trade, the Fed is the borrower of cash — it's a reverse repo from the counterparty's point of view, hence the name. Because the Fed will always take cash at this rate in whatever size is offered, no private borrower can pay a rate below it and still attract lenders, which makes the ON RRP rate a firm floor under overnight market rates.
Why it acts as a floor, not a ceiling
Unlike banks, money-market funds cannot earn interest on reserve balances directly — only banks can hold reserves at the Fed. The ON RRP gives non-bank cash lenders, principally money funds, an equivalent option: a riskless, Fed-guaranteed overnight investment. If a private borrower — a dealer needing repo financing — offered a rate below what the ON RRP pays, funds would simply not lend to that dealer; they'd put the cash into the Fed facility instead. So private market rates have to clear at or above the ON RRP rate to attract any cash at all, which is exactly what makes it a floor.
Worked example
The Fed sets the ON RRP rate at 5.30%. A dealer tries to attract overnight repo funding at 5.20%. A money-market fund comparing the two simply takes the Fed's facility instead, earning , i.e. $277.78 more overnight cash on a billion-dollar ticket, with no credit risk difference — so the dealer has to raise its bid to at least 5.30% to compete for that cash at all.
What this means in practice
ON RRP usage is one of the most closely watched numbers in short-term markets: when reserves are abundant and private counterparties don't need cash, huge sums (over $2 trillion at peaks) can pile up at the facility because nothing better is on offer. As reserves become scarcer, private borrowers can offer more attractive rates than the ON RRP, and balances drain out of the facility back into repo, Treasury bills, and bank deposits — a visible signal of reserve scarcity building in the system.
A falling ON RRP balance is not automatically a warning sign — it usually just means private market rates have become more attractive than the facility, which is the system working as designed. It only becomes a stress signal in combination with repo rates simultaneously pushing up toward the Standing Repo Facility's ceiling.
Related concepts
Practice in interviews
Further reading
- Federal Reserve Board, 'Overnight Reverse Repurchase Agreement Facility'
- Federal Reserve Bank of New York, 'ON RRP Operations'